Ecuador

Awaiting rescue

THE irresponsibility of Ecuador's feuding politicians knows few bounds. For years the country's Congress has blocked any serious attempt at economic reform. Now decline has become near-disaster. The economy may shrink by 4% this year. The banking system has collapsed. All that stands between Ecuador and a costly default on its foreign debt is an agreement with the IMF. And Congress, controlled by the opposition, is doing its best to thwart this.

President Jamil Mahuad had originally hoped to sign a letter of intent with the IMF in May, for a $400m loan that would release a further $1 billion from development banks. But events are running away from him. The IMF wants to see stronger bank supervision. On July 30th, Mr Mahuad had to veto a government bill strengthening the banking regulator, after Congress had amended it to include a cap on interest rates and an increase in deposit-guarantee cover.

After some fumbling, Mr Mahuad is trying to clean up the banks, most of whose deposits have been frozen since March. In response to an audit of the financial system by a team of international accountants, the government has decided to make bridging loans totalling $148m to four large banks, giving their shareholders a year to find new capital. Three smaller ones will have to merge with a state-controlled bank.

But failed banks will not be allowed to reopen. These include Banco del Progreso, formerly Ecuador's second-biggest. Fernando Aspiazu, its boss and largest shareholder, has been arrested and faces criminal charges, despite having the support of the powerful opposition Social Christian party (PSC). As with so many conflicts in Ecuador, the battle over the banks is coloured by a regional split: Mr Mahuad is a former mayor of Quito, the mountain capital, but the worst-hit banks are based in the port city of Guayaquil, the PSC's stronghold. Their loan portfolios suffered after flooding caused by El Niño devastated coastal farming last year.

The bank bail-out may eventually cost Ecuador around $2 billion (or some 13% of GDP). It will also add to the government's budgetary problems: its target, agreed with the IMF, of cutting the fiscal deficit to 3.5% of GDP (from 6.5% last year) now looks unreachable. Mr Mahuad's efforts to cut spending have been undone by popular anger. Last month, he was forced to cancel a fuel-price increase, after taxi-drivers and other workers struck for 12 days, and protests brought much of the country to a standstill.

All this is rapidly dimming the prospect of an IMF deal. Has it obliterated it? By stretching current rules, the government may be able to manage without its banking bill. And, despite huge political obstacles, Mr Mahuad has at least tried to reform a country notoriously resistant to economic change. Nobody in Washington wants to see him weakened further. Though there has been talk of a military coup, that is improbable; less so is an attempt by Mr Mahuad's opponents to remove the president through a vote in Congress. That fate was suffered in 1997 by Abdala Bucaram, a less worthy president who also tried to impose austerity.

But even if a letter of intent is signed, little of the promised $400m is likely to be disbursed until Congress approves new taxes for next year's budget—which seems unlikely. Nor is there any guarantee that Ecuador will be able to continue to service its foreign debt (now equal to 110% of GDP). Already it has stopped paying interest on its loans from rich-country governments.

Total debt payments are set to rise steeply next year (see chart). The interest alone on the public debt runs at around $700m a year until 2001; the most Ecuador can pay is around $500m, according to J.P. Morgan, an American bank. Almost half of Ecuador's public debt is in Brady bonds (restructured debts to commercial banks). Sooner or later, it will have to be restructured again.

For Latin America, that is worrying: by reminding investors of the risks attached to the region's bonds, it may increase the cost of capital. For Ecuador, a default would further postpone economic recovery. Even with IMF-backing, Ecuador will remain hard to govern. “There are people who say no to everything, who don't propose solutions, who boycott every way out. And Ecuador is sick of that,” said Mr Mahuad when announcing the fuel-price freeze. How right he is. But perhaps the country is not yet sick enough of the old ways to embrace new ones.